Federal File

Coverage of legislation and regulatory activity that affects higher education

By Liz Clark

Obama FY13 Budget Proposes Tax Reform, Revisits Bonds

President Obama's $3.8 trillion federal budget proposal for FY13 included a call for “Congress to undertake comprehensive tax reform to cut rates, cut inefficient tax breaks, cut the deficit, and increase jobs.” Among the administration's specific tax proposals were several items of interest to higher education:

Limit the exclusion of tax-exempt interest for municipal bonds to 28 percent.

Reinstate and make permanent the Build America Bonds program, which expired at the end of 2010 after its introduction in the American Recovery and Reinvestment Act of 2009 (ARRA). The program authorized state and local governments to issue Build America Bonds as taxable bonds in 2009 and 2010 to finance any capital expenditures for which they otherwise could issue tax-exempt governmental bonds.

Extend eligible use of Build America Bonds to 501(c)(3) entities, such as nonprofit hospitals and universities.

Mixed Reviews on Tax-Exemption Limits

The proposal to limit tax-exempt interest on municipal bonds alarmed some market watchers; however, the current climate on Capitol Hill tempered the reaction to some extent. With tight budgetary restraints and little or no bipartisanship in either the Senate or the House—compounded by election-year gridlock—the ability to agree on a budget compromise or other new legislation this year will be extremely limited.

Last year, President Obama also proposed limiting tax-exempt interest on municipal bonds, and NACUBO strongly urged Congress to protect tax-exempt bond financing, which contributes to the financial health of many colleges and universities. NACUBO maintains this position and believes that the limitation would unreasonably alter a sound infrastructure financing tool that is important to many of our member institutions.

Some Support for Build America Bonds

Unlike the plan to limit tax-exempt bond interest, the administration's plan to revive the Build America Bonds program was met with some approval, particularly by state and local government officials.

Last year, NACUBO strongly urged Congress to protect tax-exempt bond financing, which contributes to the financial health of many colleges and universities.

Build America Bonds are taxable, but rather than allowing state and local governments to pay tax-exempt interest to bondholders, the federal government would provide a direct subsidy to the borrower. For the Build America Bonds program, the ARRA provided a subsidy rate equal to 35 percent of interest costs. The new proposal would provide a 30 percent annual subsidy rate for two years and a 28 percent annual rate thereafter. Additionally, the White House would extend eligible use to 501(c)(3) entities, including private nonprofit colleges and universities.

NACUBO supports the reinstatement of the Build America Bonds program as an additional tool to finance capital projects and is particularly supportive of the effort to broaden the program to include 501(c)(3) entities.

Prospects for Tax Reform

While President Obama's overarching tax plan is unlikely to move on its own, Congress does hope to take on comprehensive tax reform after the November elections. The president's proposals are then expected to be taken into some consideration, as the congressional tax-writing committees move forward with hearings, discussion, and debate on the federal tax code.